Mumbai: The Indian government has announced rules for setting up real estate investment trusts (REITs), vehicles that may spur $20 billion of property development. None of the money will be spent unless the country’s tax code is revised.

“REITs cannot take off in India until changes are made in the tax regime,” Anshuman Magazine, chairman of CBRE South Asia Pvt. Ltd, said in a telephone interview from New Delhi. “Until these issues are resolved, there isn’t much incentive for developers to take the trust route.”

REITs will provide a new source of funds to debt-laden Indian developers to construct malls and office buildings, bolstering Prime Minister Narendra Modi’s efforts to revive Asia’s third largest economy. Tax rules that make it unattractive to sell a security in less than three years and concerns about levies to be paid by builders may prolong the wait for greater transparency in a sector where asset pricing often is opaque.

The Securities and Exchange Board of India (Sebi), the country’s market regulator, released rules for establishing REITs on 26 September, giving investors the ability to participate in the country’s property market without investing directly. The trusts will have to own assets valued at least `500 crore and investors must put in a minimum of `2 lakh, the regulator said.

“Sebi doesn’t oversee India’s tax regulations, though, and for now those remain a deterrent to creating or investing in REITs,” Magazine said.

Tax hurdles

“The tax bill for starting a REIT would be higher than for raising money through an initial share sale,” Bhairav Dalal, associate director for tax and regulatory practice at PricewaterhouseCoopers in Mumbai, said in an e-mail. “Until a finance Bill is passed to change certain rules, the tax cost might impact the returns offered to investors.”

Investors are disadvantaged by REITs because, under existing rules, shares in them must be held for three years before they are exempt from capital gains tax, unlike investments in “listed securities,” which gain the exemption after one year, Dalal said. There is also a lack of clarity on whether the developer setting up the trust would have to pay the so-called minimum alternative tax.

Sebi is in discussions with the finance ministry to resolve tax issues that may be hindering the listing of REITs, Sebi chairman U.K. Sinha said in Mumbai on 8 October. He didn’t give a timeframe for when the code will be changed.

March 2016

Changes to the tax regulations aren’t likely to be announced before the presentation of the next Indian government budget in February, CBRE’s Magazine said.

“The first REITs aren’t likely to be listed until late in the Indian fiscal year that ends in March 2016,” said Anubhav Gupta, a Mumbai-based real estate analyst at Kim Eng Securities Pvt. Ltd.

The property trusts pool investor money to buy real estate such as shopping malls, office buildings and rental housing. REIT-funded assets may reach $20 billion by 2020, according to an estimate from property-broker Cushman and Wakefield, of which as much as $12 billion could be raised in the first three to five years.

India has plenty of assets ready to be packaged into trusts. Asia’s third-largest economy has been in the top five global office markets for at least seven years, with average annual net demand of more than 30 million square feet (2.8 million square meters), according to Cushman and Wakefield.

Developer debts

DLF Ltd, India’s largest developer by value with about 28 million square feet (2.6 million square meters) of operational rental assets;Prestige Estates Projects Ltd, a Bengaluru-based developer; Phoenix Mills Ltd, a Mumbai-based mall operator and Oberoi Realty Ltd are among developers that will benefit listing REITs, Gupta said by phone on 7 October.

DLF was on Monday barred from raising funds in the market for three years by Sebi for failing to disclose information during its initial public offering (IPO).

The combined debt of the six largest Indian developers climbed to a record `39,400 crore in the 12 months through 31 March, more than double the `15,880 crore in 2007, according to data compiled by broker IIFL Ltd. India has the highest borrowing costs among major Asian economies.

The S&P BSE India Realty Index has gained 9.1% this year. DLF has lost 12%, while Prestige has jumped 41% and Phoenix Mills 60%. The benchmark S&P BSE Sensex has climbed 25%.

Foreign institutional investors such as Blackstone Group LP and Brookfield Asset Management Inc. (BAM), have been accumulating Indian rental assets in part with the aim of one day creating REITs, according to a 10 July report from HDFC Securities. Blackstone is the largest private-equity landlord of office assets in India, with about 22 million square feet. Brookfield has about 15 million square feet across the country.

“REITs are a game changer that can bring about more liquidity and transparency into the Indian realty market,” Magazine said. “Domestic and foreign stakeholders have been preparing for this instrument. The question is how long will government take to make amendments to make this product a reality.”

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